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15 January 2012

The incredible shrinking UK economy

The magnitude of the blow suffered by the UK economy since the beginning of the financial crisis is very considerably minimized by not presenting it in terms of a common international yardstick. Gauged by decline in GDP, using a common international purchasing measure, dollars, no other economy in the world has shrunk even remotely as much as the UK (Figure 1 and Table 1).

As most countries produce only annualized GDP data it will be necessary to wait before a comprehensive global comparison can be made for 2011. However it is clear no substantial growth in dollar terms took place in the UK economy during that year – GDP at national current prices rose only 1.4 per cent between the 1st and 3rd quarters and the change in the pound’s exchange rate against the dollar during the year was a marginal 0.3 per cent. Therefore there will have been no significant recovery from the UK data set out in Table 1 below, and the gap between the UK and other European economies, which form the next worst performing major group, is too great to have been qualitatively affected by changes in the Euro’s exchange rate – the Euro declined against the pound by only 3.3 per cent in 2011.

Table 1 shows that the fall in UK GDP in 2007-2010 was $562 billion compared to the next worst performing national economy, Italy, with a decline of $65 billion – i.e. the decline in UK GDP in the common measuring yardstick of dollars was more than eight times that of the next worst performing national economy. Table 1 shows the 10 national economies suffering the greatest declines in dollar GDP.

It is also extremely striking that the UK’s decline was more than two and a half times that of the entire Eurozone. The UK accounted for a somewhat astonishing 77 per cent of the EU's decline.

Table 1

Figure 1

Expressed in percentage terms the situation is no better. of all economies for which World Bank data is available only Iceland, with a decline in dollar GDP of 38.4 per cent, suffered a worst percentage fall than the UK - even bail out economy Ireland, with a fall of 18.4 per cent, outperformed the UK economy.

Two trends intersected for the UK's performance to be so much worse than that of any other economy. First, contrary to the government's anti-European rhetoric, UK economic performance in constant price national currency terms has been significantly worse than the Eurozone during the financial crisis (Figure 2). Up to the latest available data, for the 3rd quarter of 2011, UK GDP was still 3.6 per cent below its pre-financial crisis peak compared to the Eurozone's 1.7 per cent below. Second, between the beginning of 2008 and the beginning of 2012, the pound's exchange rate has fallen by 21.0 per cent against the dollar compared to the Euro's 11.4 per cent drop in the same period. The multiplicative effect of the severity of the relative drop in constant price GDP and the fall in the pound's exchange rate accounts for the unequalled decline in UK GDP in dollars.

Figure 2

As at present the UK economy shows no substantial sign of recovery, the present UK government, which maintains a steadfastly ostrich like attitude towards Europe in particular, and most other countries in general, may argue that a measure in terms of dollars at current exchange rates is irrelevant – the UK currency is the pound and what counts is constant price shifts. Such an argument is false and an attempt to disguise the true scale of the decline of the UK economy.

The internationally unmatched decline in UK dollar GDP is a huge fall in real international purchasing ability. The far higher than targeted inflation in the UK during the last two years, which has substantially eroded the population's living standards, is itself in part a reflecton of the decline in the UK's exchange rate and consequent raising of import prices. In short, the decline in the international purchasing power of the UK's economy translates into a direct fall in real incomes. The decline in the UKs ranking among world economies in terms of GDP, being recently overtaken by Brazil, statistically reflects the same process.

It may also be seen that the government's claim that the UK is outperforming Europe and the Eurozone is entirely without foundation even in constant price national currency terms. But when measured in terms of real international comparisons, i.e. in dollars, the UK's performance is incomparably worse than Europe's.

It appears extremely unlikely that the UK's economy will escape from this circle of decline in the next period. The austerity policies pursued by the present UK government have substantially slowed the economic recovery that was taking place in 2009 and the first part of 2010 - between the 3rd quarter of 2010 and the 3rd quarter of 2011 the UK economy grew by only 0.5 per cent. The opposition Labour Party has recently also endorsed essentially the same austerity policies which have failed not only in the UK but in other European economies, such as Greece and Ireland, where they have been pursued.

Even if any partial recovery takes place, for example by some increase in the exchange rate of the pound against the Euro, the sheer magnitude of the decline in the UK economy makes it implausible that this could be on a scale sufficient to reverse the fall in its relative international position.

Comments

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@ Juan Perez,

2007 was chosen as the starting point because it was the last year before the onset of the international financial crisis. The aim of the article was to show that in terms of real international purchasing power the UK had done far worse than any other economy during the international financial crisis - 2010 had to be taken as the end point as most countries GDP data for 2011 is not yet published but, as the article shows, there will have been no great change during this year. The data therefore simply clearly confirms that the UK's loss of real economic weight during the financial crises was worse than in any other country.

I'm sorry Professor Ross your choice of 2007-2010 UK GDP reflected in USD seems a bit short. Take a decade long perspective say 2003-2012 and the fall will be less dramatic.

I havn't done the homework that you have with your graphs but I know this. In 2003 (from google 1GBP=1.60USD). In 2012 Feb 1GBP=1.55USD. That's approx. 5% decrease in value against the USD.

You were only able to show the freak 500+ Billion dollar decline because the GBP was in a bit of a "freak phase" where the value shot up. It wasn't going to last. It was the global financial boom and...shortly after the bust came.

British imperialism hopefully coming to an end. I am English and living abroad and this seems very much in line with the reality in the UK.
Three clueless political parties, self-serving and apathetic towards the plight of the people.
The sooner Britain breaks up the better, Scotland and Wales would be better off without dictatorial Westminster and London city consuming wealth and attention when there are more important matters to be attending.

Very interesting, thanks.
Its good to know my impression of the way things are going is right [i think]. The politicians seem much more concerned about carving up the pie, [to satisfy their sponsors?], and spending fortunes on marginally useful schemes, than in enhancing the lives of the majority by kickstarting the 'real' economy. Perhaps they don't know how.

Frankly, if Britain's international position were to shrink significantly then that would be good for the rest of the world - the ability of Britain's rulers to be imperialistic bastards would be reduced.